Navigating the Economic Landscape

David Kotok on Why We Need to Go Over the Cliff

Posted by Larry Doyle on December 6, 2012 8:26 AM |

When might an individual with serious personal problems decide to make necessary change in his life? When they reach the depths of hell and decide “it does not need to be this way and it won’t any longer.”

How about a nation? Is there any doubt our nation faces enormous problems, fiscal and otherwise? The manner in which we confront these problems will have a profound impact on our nation for generations. Will Washington swerve and avoid the fiscal cliff that some believe will lead us into a hellacious recession or are we better off actually experiencing that so as to finally wake up and make the necessary change? Are we even capable?

David Kotok of Cumberland Advisors provides real ‘sense on cents’ on this topic in response to a question posed to him, “what would you like see happen with the fiscal cliff?”

Let’s navigate as Kotok writes,

Numerous readers have emailed and asked me a personal question: “What would YOU like to see happen with the fiscal cliff?” We thank you for the question.

Please remember, this missive will not be about what is going to happen. We do not know that outcome and neither does anyone else. We hold an opinion that there is a deal coming. We think it will be at the 11th hour or even early next year after we tumble over the January 1 cliff. But that is just an informed guess. President Obama didn’t add much clarity to that view in his Bloomberg interview today. Readers may see it and hear it on Bloomberg.com.

Instead, today’s letter is about what we would like to see happen, and why. My view is simple: until we experience the cliff, we will not understand what it really means. Hence, we will not act wisely if we do it prospectively.

We believe the markets and citizenry are too complacent about our government. US investors are used to watching the Washington charade. Voters, in nearly every congressional jurisdiction, are trapped by limited choices, which is why we re-elect most incumbents. Our politics are the politics of default choices.

Our markets are driven by forces such as low interest rates and global demand and geopolitical risk. We go on about our daily business in spite of our broken government. We engage in a collective trillion economic decisions each and every day, without government help. Leave us alone and we can pretty much figure out what to do.

We have a broken political system, in which our leaders are about as popular as the proverbial used-car salesperson (according to recent polls). Most of us feel that way about them but cannot do anything about it, so we go on with our lives and let the self-serving “leaders” in Washington decide our fate.

One defining characteristic of Americans is to rally in time of crisis. We do that in wartime. We do that with natural disasters like Katrina and Sandy. We do that with regard to health matters. We are generous with our charity. Mainstream Americans are mostly good folks. But we are reactive, not proactive.

So, let’s see if we can rally to deal with this government crisis. But we won’t do it unless and until we know we have a real crisis on our hands. So, let’s have at it. To get there, we need to go over the cliff and stay there long enough to actually begin to experience what it feels like, and what it means, to be off the precipice.

Let’s see what happens when all the income tax credits expire on lower incomes and when 140 million Americans get hit with an average $1000 a year in a payroll tax hike. Let’s see what the experience is when sequestration kicks in hard. Let’s watch the layoffs of defense contractors who have to downsize since they won’t be paid by the federal government. Let’s tax capital and dividends and income at high rates and let our citizens begin to feel the impact in their pocketbooks. Let’s tax estates at confiscatory rates. Let’s allow tax-free bonds to be penalized when our schools and sewer systems need financing. Let’s subject 24 million folks to the alternative minimum tax. And on, and on, and on.

The political morons generalize in their pronouncements because they fear giving us real details. Our president repeatedly attacks the rich with class-warfare rhetoric. He says upper 2% of income but he doesn’t say that many are independent businesses. Does he ever mention an S-Corp small business that is trying to accumulate capital to grow a business and hire folks? Many small businesses finds themselves burdened with a marginal effective tax rate above 50% under the present tax system – before we even go over the cliff? That is where a small business can find itself when all taxes imposed are combined.

Obama avoided this detail today. He cited CEOs of big companies. He ignored the half of the country that is small and independent firms even while claiming that 97% of them will benefit.

Obama uses the new-age definition of millionaire: a couple filing a joint income tax return with a $250,000 annual income. He never mentioned that his failure to compromise means the lower-income tax groups will incur a very high tax hike once we’re off the cliff. He never admits that some of the lower middle-class tax rates he claims are obtained are in place by using the deception of credits.

The Republicans are not any better. Republicans never say, “We defend the 15% carried interest provision.” They never explain the details by which many wealthy Americans benefit from provisions in the tax code that are engineered to benefit the few at the expense of the many. They just say no changes in tax rates. And now they are clamoring for “revenue,” which means changing the tax code, not the rates.

Readers, please note, it is the effective tax rate that really counts. Let me repeat and add clarity. It is ONLY the effective tax rate that counts.

Both Republicans and Democrats are disingenuous. That is a nice term for lying to us and deceiving us and using fuzzy language to mask the truth.

So, my personal proposal is to have a major fight and a resulting stalemate that persists until there is real pain in the land. I would like to see my fellow citizens get really angry with Washington and set aside their partisan differences and then throw out some of the bums of both parties.

I would like to see us get mad enough and scared enough and clear enough about what’s really happening to us, that we realize we have to pull together to claw our way back from the cliff and get this country on stable ground.

Let me invoke a scene from a movie that will date me. What I want you to do is throw open the window, stick out your head, and yell “I’m mad as hell and I’m not going to take this anymore.” If you are too young to remember the movie, Google the phrase and watch the scene (YouTube will take you there).

That is what I would like to see happen, dear readers. We need to open our windows and yell. Get 314 million of us angry enough at our government, and we will stop this nonsense. Unless we get that angry, this broken-down system of ours is going to go clickety-clack right off the cliff.

Happy holidays to all cliff dwellers (us). Get angry. Tell your congress people that you’re angry. Whether you’re Democrat or Republican, be angry, be clear-headed, and demand the truth. It’s our country!

Thank you for asking.

David R. Kotok, Chairman and Chief Investment Officer

Are you mad enough yet? Do you think this clip running a mere 1:41 is now less a movie and more the reality within our nation? Watch it and then let us know how you feel? What would you like to see happen with the impending fiscal cliff?

I thank the regular reader who brought this missive by Kotok to my attention. If you are mad enough, I hope you will share it with others. If not, then the lies and the liars in Washington will continue to carry the day and we will ALL suffer.

I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

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Martin Feldstein on the need to reform entitlement programs
Martin Feldstein chaired President Ronald Reagan’s Council of Economic Advisers from 1982 to 1984.

Joseph Stiglitz on why America’s wealthy must pay more in taxes
Joseph Stiglitz chaired President Bill Clinton’s Council of Economic Advisers from 1995 to 1997.

Laura D. Tyson on how America can avoid the fiscal cliff
Laura D. Tyson chaired President Bill Clinton’s Council of Economic Advisers from 1993 to 1995.

Mohamed El-Erian on how a lack of political will impedes a grand bargain on fiscal reform
Mohamed El-Erian is CEO of PIMCO.

Mark J. Novitsky

“Might” go over the “Fiscal Cliff”(tm.) – “WE” already have a nearly $17 TRILLION DEBT and 1 QUADRILLION in TBTF Derivative expoasure (weapons of financial mass destruction. W. Buffet) – And we MIGHT go over a cliff? A cliff Into LAVA!

Eddie

Yup!!

Randee

President Obama has an election night mandate, folks. You tea baggers lose. Taxes must go up and they must go up hard for the wealthy. It’s time for those born with a silver spoon to share their good fortune. Redistribute, redistribute. It’s good for the soul. Where’s my Lamborghini?

LD

Here is your mandate.

Remember, America is supposed to be about equal opportunity not equal outcome. Envy is not a virtue it is a vice.

Most voters still put growing the economy ahead of a level economic playing field, despite increasing calls for higher taxes on the wealthy.

A new Rasmussen Reports national telephone survey finds that 54% of Likely U.S. Voters think economic growth is more important than economic fairness. Thirty-seven percent (37%) disagree and put economic fairness first.

Got a bitch about equal opportunity? All ears here. Looking for a handout? Keep walking as you have the wrong site.

Randee’s classless act leaves me wondering if his note is meant to be sarcastic or he really means that crap…

Jim

Yup, no Kool aide here, if we thought the last ten yrs were wild, wait till we live thru (hopefully) the next ten.

The macro goal of the socialists is a one world currency and traumatize capitalism at every opportunity. Right now it appears they are succeeding.

As I mentioned a couple a weeks ago here’s Boehner capitulating to the spending addicts & debasing the USD.

When this act blows it’s gonna be loud.

Cheers. . .

Jim

Let the Dems take us over the cliff…

SEN. RAND PAUL: I have yet another thought on how we can fix this. Why don’t we let the Democrats pass whatever they want? If they are the party of higher taxes, all the Republicans vote present and let the Democrats raise taxes as high as they want to raise them, let Democrats in the Senate raise taxes, let the president sign it and then make them own the tax increase. And when the economy stalls, when the economy sputters, when people lose their jobs, they know which party to blame, the party of high taxes. Let’s don’t be the party of just almost as high taxes.

LARRY KUDLOW, CNBC: Some people have called that the doomsday scenario. Others have said, ‘Look, it’s a strategic retreat on the Republicans’ behalf.’ WWould you vote present for that in the Senate if that came up?

RAND PAUL: Yes, I don’t think we have to in the Senate. In the House, they have to because the Democrats don’t have the majority. In the Senate, I’m happy not to filibuster it, and I will announce tonight on your show that I will work with Harry Reid to let him pass his big old tax hike with a simple majority if that’s what Harry Reid wants, because then they will become the party of high taxes and they can own it.

I tend to agree with Rand Paul. Let Obama, Reid, Pelosi have exactly what they are asking for and let them put their stamp on it. In true Obama fashion, the republicans should vote “present”…let’s see them run on their agenda next time around.